Transient impulses caused by local faults are critical informative indicators for rolling element bearing fault diagnosis. The methods for accurately extracting transient impulses while suppressing strong background noise and interference components have received extensive studies. In this article, a novel fault diagnosis scheme based on optimized wavelet packet denoising and modulation signal bispectrum is proposed, which takes advantage of the transient impulse enhancement of wavelet packet denoising and the demodulation ability of modulation signal bispectrum to diagnose bearing faults more accurately. First, the measured signals are decomposed into a series of time–frequency subspaces using wavelet packet transform. An optimal threshold value is selected based on the proposed threshold criterion by considering unbiased autocorrelation of envelope and Gini index of the transient impulses. Subsequently, the subspaces are denoised by the wavelet packet denoising with the optimized threshold value, and the master subspaces that containing the fault-related transient impulses are selected based on the Gini index indicator. Finally, the modulation signal bispectrum is utilized to further purify the signal and extract the modulation components contained in the transient impulses, and the suboptimal modulation signal bispectrum slices are selected based on the characteristic frequency intensity coefficient. The modulation signal bispectrum detector is then obtained by averaging the suboptimal modulation signal bispectrum slices to determine the type of the bearing faults. The proposed wavelet packet denoising-modulation signal bispectrum is validated based on the simulation and experimental studies. Compared with the variational mode decomposition and Teager energy operator, fast kurtogram as well as conventional modulation signal bispectrum, the proposed wavelet packet denoising-modulation signal bispectrum method has superior performance in extracting the fault feature of the incipient defects on different bearing components.